Choosing a housing loan is a complicated process. All borrowers want to minimize the costs of borrowing. So before finalizing a housing loan, you should analyze the conditions subject to which the loan is being offered. Many of the conditions have an impact on the total cost of the loan.

With keen competition in the housing loan market, banks are coming out with new and innovative products. In this scenario, choosing one that comes at the lowest cost becomes difficult. In addition to the interest rates, many other costs and benefits should be analyzed. Although individually these may look insignificant, cumulatively they have a substantial impact. A borrower should seek all details from the bank. A borrower can negotiate on most of these charges depending on the loan amount, tenure and his credibility.

Charges and fees levied

Processing Fees: It is payable at the time of filing of the loan application. This is non-refundable and is charged to cover the costs of determining the loan eligibility of the potential borrower. It varies from 0.5 to one percent of the loan applied for.

File Charges: These are charges for preparing the documentation. Some banks and HFCs charge this fee.

Legal Charges: These pertain to the legal evaluation of the house documents. Some banks charge this separately.

Commitment Charges: These charges are payable if the loan is not utilized within a specified period of time after sanction.

Administrative Fee: This is payable on the acceptance of offer i.e. once the loan has been sanctioned. The amount is the same as processing fees – 0.5 to one percent of the loan sanctioned. Some companies charge both processing and administrative fees together.

Commencement of EMI: In some cases, EMI starts from the month of final disbursement of loan. In other cases it starts from the month following that. Depending on the cash flow position of the borrower, a decision on this behalf should be taken by him. The timing of commencement of EMIs has an impact on the total interest cost to be paid by the borrower over the period of loan.

Change of mode of interest: In case you want to switch over from a floating rate to a fixed rate (because the interest rates are excepted to come down) you will have to pay a penalty amount to the lender.

Insurance: Some banks insist that the house should also be adequately insured or the borrower should take a life insurance policy where the sum assured is at least equal to the loan amount. Some offer free insurance to the borrower or the house.

Switchover charges: In case of borrower decides to switch over from one bank to another, because the other is offering better terms, a penalty is charged. However, if the loan is repaid out of one’s own funds, these charges may not be payable.

Prepayment charges: Some banks levy prepayment penalty in case the loan is repaid before the full term or certain agreed minimum period. This is done because it disturbs their cash flow and income estimates. The amount varies from one to five percent of the outstanding amount of loan. Some banks do waive off these charges. The charges are payable on the balance amount outstanding.

TAX BENEFITS ON HOME LOANS

Tax benefits on housing loans are available on both the principal and interest repayments.

Principal repayments: A borrower may avail of a tax rebate under Section 88 of the Income Tax Act on a percentage of the principal repaid during a year, up to the maximum extent of Rs. 20,000. The amount of rebate depends on the income of the borrower.

· Salary income tax rebate as percentage of principal repaid
· Up to Rs. 1,00,000 – 30 percent
· Between Rs. 1,00,000 and Rs. 1,50,000 – 20 percent
· Between Rs. 1,50,000 and Rs, 5,00,000 – 15 percent
· Over Rs, 5,00,000 – Nil

Interest repayments: Interest repayments on housing loans are allowed as deductions from the annual value of a residential property. Annual value is used to determine the income an individual is expected to receive from a residential property and is the greater of
a) The actual rent received for a property
b) The notional rent expected from a property as determined by its municipal rateable value, fair market rent, and other factors.
However, the annual value of one self-occupied property per individual is considered to be nil.

The amount of allowable deduction depends on whether the property is self-occupied, rented, or vacant, and for what purpose the loan has been availed.

Self-Occupied Property: Interest payable up to Rs. 1,50,000 per annum on loans taken for construction or purchase of a property for self-occupation is allowed as a tax exemption, if the house has been constructed on or after April 1, 1999. Prior to this date, the maximum exemption is limited to Rs. 30,000. If the loan has been taken for repair or reconstruction of a property the exemption is also limited to Rs. 30,000

Since the annual value is nil, these deductions cause a negative value or loss under the head ‘Income from house Property’, which may be set off against incomes from other residential properties or against other heads of income such as Salary or Business income.

Rented Property: If a property is rented, the greater of the actual rent received and notional rent as determined by the authorities is considered as the annual value of the property. The entire interest amount payable on money borrowed to build/buy/repair a property is allowed as deduction from annual value to arrive at the net income from the residential property.

Vacant Property: The annual value of a vacant property is the notional rent as fixed by the authorities. Interest payable on loan for construction/acquisition/repair/reconstruction may be deducted from the net annual value as outlined for rented properties above.

Vacant property away from city of work: If a person bought a house for the purpose of self-occupation but has been unable to live in it, having been posted away from the city on work, then that property may be considered as self occupied provided he owns only that one property. The property should be vacant and no rent or any other benefit should be derived from it.

Multiple properties: If a person owns multiple properties, more than one of which is self occupied, he may choose any one property to be designated as self-occupied, and the others will be deemed to be rented and notional rent will be treated as the annual value of these properties. The deductions in respect of interest on housing loans will be as outlines above for self-occupied and rented properties respectively.

Some points to be noted

For multiple ownership, where the shares of owners can be determined, the income from a residential property will be proportionally allocated to each owner and concession for self-occupation will be available to each owner.

If a loan is taken for an under-construction property, the interest payable before the final completion of the property can be claimed as deduction only after completion of the property by aggregating this interest and setting it off in five equal installments over five successive financial years starting from the year in which the property is completed.

HOUSING FINANCE CURRENT SCENARIO

Customers currently planning to take a home loan could do well to go in for a fixed rate as the bias today is towards higher interest rates. Those who are looking to swap and existing floating rate loan with a fixed one, an important determinant of whether to swap or not should be based on their long-term expectation of interest rates and also the cost of swapping taking into account the outstanding tenure of the loan, the amount outstanding and the likely extent of interest rate increase.

For Ex: if one expects rates to rise may be for the next one year, but then decline gradually over the next several years, a floating rate product may be preferable. If one decides to convert to a fixed rate, then the costs of conversion could entail a conversion fee of 1-2 per cent of the outstanding loan amount. If one decides to change the lender instead to convert to a fixed rate, then they are most likely to pay a foreclosure penalty of 2 per cent of the outstanding amount as well as 0.5 – 1 per cent of the new loan amount as processing and administrative charges to the new lender. One has to incur all these costs, and then conversion to a fixed rate may not make financial sense.

Again a fixed rate loan is generally priced higher as compared to a floating rate product. This holds true in the current environment where the fixed rate loan is at a higher interest rate as compared to a floating rate loan. The difference is currently about once percentage point. So if the customer expects that interest rates are likely to move up, but only to the extent of this differential, then they should ideally be indifferent between the two types of loans.

When a customer is indecisive about whether to go in for a fixed rate or floating, guide and educate the customer and lay out the options before and leave the final decision to the customer, which is based on his needs and requirements and ability to take risks.